Exxon looks to reduce cost of Permian crude to $15 a barrel well below that of most OPEC producers

Bloomberg/Rig Zone:
Exxon Mobil Corp. plans to reduce the cost of pumping oil in the Permian to about $15 a barrel, a level only seen in the giant oil fields of the Middle East.

The scale of Exxon’s drilling means that it can spread its costs over such a big operation that the basin will become competitive with almost anywhere in the world, Staale Gjervik, president of XTO Energy, the supermajor’s shale division, said in an interview.

Development, operating and land acquisition costs will be “in and around $15 a barrel,” he said on the sidelines of the CERAWeek Conference by IHS Markit in Houston. West Texas Intermediate futures traded at almost $59 on Thursday. “The way we are approaching it is very unique compared to most, if not really everybody out there, as far as the scale," he said.

The shale revolution has made the Permian into the world’s largest shale field, with production topping 4 million barrels a day, almost as much as Iraq, OPEC’s second-biggest member. But the rapid growth has often meant that producers burn cash flow to reinvest in the expansion, prompting investors to call on them to focus more on returns in 2019.

Exxon plans to deploy 55 rigs in the Permian this year, by far the most of any driller, as it aims to increase output in the region fivefold to about 1 million barrels a day by 2024. Its strategy also includes building its own takeaway infrastructure from separation tanks to pipelines, and it’s even joining a giant conduit project to make sure its oil doesn’t get stuck in bottlenecks that have depressed prices in West Texas.

Some analysts raised their eyebrows over Exxon’s ambitious plan for the Permian, but Gjervik -- a Norwegian who joined Exxon in 1998 and has worked in Angola, Nigeria and the North Sea -- argues that it’s exactly that kind of massive scale that will help the company generate $5 billion of cash flow from the region by 2023.
Chevron is also working on increasing the economy of scale in the region.  I remember thinking when the shale production began in the Permian that it was strange that the major oil companies were not involved.  Exxon was working on a high-risk venture with the Russians in the Arctic that they have since pretty much abandoned because of sanctions and other majors were investing in Africa or in offshore projects.  Their current operations in the Permian Basin now look much more rational.

At $15 a barrel, it looks like OPEC has lost the ability to impact the operations with predatory pricing schemes.


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